Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Morgan Stanley (NYSE: MS ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Morgan Stanley.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.2%)||Fail|
|1-Year Revenue Growth > 12%||(5.1%)||Fail|
|Margins||Gross Margin > 35%||88.1%||Pass|
|Net Margin > 15%||8.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||528.5%||Fail|
|Current Ratio > 1.3||1.60||Pass|
|Opportunities||Return on Equity > 15%||4.3%||Fail|
|Valuation||Normalized P/E < 20||9.78||Pass|
|Dividends||Current Yield > 2%||1.4%||Fail|
|5-Year Dividend Growth > 10%||(28.6%)||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Morgan Stanley last year, the company hasn't improved on its three-point score. The stock has been stuck in the doldrums, though, with a 15% drop over the past year.
Morgan Stanley has been squarely in the limelight lately, and not in a good way. As lead underwriter for the Facebook (Nasdaq: FB ) IPO, Morgan Stanley found itself in the hot seat when the social media giant's IPO got off to a rough start, with trading glitches that led to opening-day delays eventually leading to severe price declines that have shaved off half of Facebook's value in just a few months.
Fallout from the Facebook debacle could severely hurt Morgan Stanley's future. In 2011, the company led all IPO underwriters with nearly $10 billion in proceeds, beating out Bank of America (NYSE: BAC ) and its Merrill Lynch unit, along with Goldman Sachs and JPMorgan (NYSE: JPM ) . Reputational damage could cost Morgan Stanley its leadership role, although the company is fighting hard to retain its edge.
Moreover, brokers are facing a tough environment right now. The rate environment has led to lower investment income, which has hurt both Goldman and E*TRADE Financial (Nasdaq: ETFC ) along with Morgan Stanley. With the Fed likely to keep rates low for a long time, those headwinds aren't going away anytime soon.
For Morgan Stanley to improve, it needs to get past the Facebook troubles and re-establish itself as a major Wall Street player. If it can do that, then its relatively cheap valuation gives the stock plenty of room to run.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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